19 June 2018

1. Government increases 'Carpet area' limit for interest subsidy under affordable housing

The carpet area for MIG I category houses has been raised from 120 square metre to 160 square metre while that of MIG II category houses has been increased from 150 square metre to 200 square metre.

(Source: Indian Express, 13 June, 2018)

Research View

With an aim to boost affordable housing, the Ministry of Housing and Urban Affairs has approved the revision of the carpet area of houses eligible for interest subsidy for the second time in less than a year. Now, the carpet area for MIG I category houses has been raised from 120 sqm to 160 sqm while that of MIG II category houses has been increased from 150 sqm to 200 sqm. Under the Credit Linked Subsidy Scheme (CLSS) for MIG-I, 4% interest subsidy is available on loan up to INR 9 lakh for people, with an annual income between INR 6-12 lakh, while 3% interest subsidy is given on loan up to INR 12 lakh to people with income between INR 12-18 lakh per annum. Under CLSS, a beneficiary can avail subsidy up to INR 2.35 lakh, and it is applicable for the first-time home buyers till 31 March, 2019. In our opinion, the move will make more buyers eligible for interest subsidy and will also help to reduce the inventory overhang in the housing sector. It seems to be a positive step to provide some respite to the middle-income group and improve the demand. However, we believe, to revive the housing sector, we need a strong demand-side push in the mid-segment, which can only come through a strong economy that makes available ample job opportunity and job security for the buyers.

2. Ind AS 115 impact: New accounting standard bodes well for home buyers

The Cabinet on Wednesday approved promulgation of an ordinance to amend the 16-month-old Insolvency and Bankruptcy Code (IBC), which proposes to classify home buyers as “financial creditors” at par with lenders to help them quickly get refunds from defaulting companies.

(Source: Moneycontrol, 11 June, 2018)

Research View

The fundamental principle of the new accounting standard is that the revenue should be recognised only when an entity transfers the control of goods or services to a customer. The real estate companies have to switch to the project completion method from existing percentage completion method to recognise revenues. Earlier, the companies used to declare the turnover considering the payment from the customers for the under-construction flats. Net income generated from such projects was also treated as profits. But now, the proceeds of the ongoing projects will be treated as advances or loans and not as income from sales. Also, revenue recognition at the end of the contract would mean expenses directly related to that contract/project get recognised at the end of the contract. In our opinion, these changes will not only impact the revenue recognition, but also alter the net profits and net worth of the real estate companies. However, we believe it will be beneficial to both developers and investors in the long run as the adoption of the new IFRS based accounting rule will enable them to look at sustainable earnings based on actual deliveries rather than excessively relying on pre-sales and accounting margin. In order to adopt the new accounting rule, most of the developers will need to reverse the unrecognised profits in their balance sheets, which may be detrimental for book values in the short term. However, it should get compensated on higher earnings from projects where revenues/profits will again get recognised, thus the overall impact should get normalise within one to two years. The new standard will be applicable for the companies having net worth more than INR250 crore from 1 April, 2018, and will replace the existing revenue recognition standard IndAS11 (Construction Contracts) and IndAS18 (Revenue) and revised guidance note of the Institute of Chartered Accountants of India (ICAI) on Accounting for Real Estate Transactions 2016.

3. GST, infrastructure status drive PE investments in warehousing

The infrastructure status to the logistics sector that includes industrial parks, cold chains and warehousing facilities has been helping in attracting private investments.

(Source: ETRealty, 11 June, 2018)

Research View

The Indian logistics and warehousing sector is undergoing a revolutionary change due to the various government interventions such as Make in India, National Manufacturing Policy (NMP), favourable policy regimes allowing 100% Foreign Direct Investment (FDI) in e-tailing marketplace, roll-out of the Goods and Services Tax (GST), and the most recent infrastructure status grant to this sector. Several international players such as FedEx, Kintesu World Express, DHL and TNT have already entered logistic market, through mergers & acquisitions and joint ventures with Indian logistics companies. Last year, Canada Pension Plan Investment Board’s (CPPIB) acquired a major stake in IndoSpace, for ~USD500 million (INR3,252 lakh), making it to be the most significant industrial and logistics deal of 2017. Recently, state-owned Singapore-based investment firm Temasek and Ascendas-Singbridge announced their plans to invest INR2,000 crore (USD307 million) across critical logistics and warehousing markets of India. We expect rapid growth in e-commerce, retail, fast moving consumer goods (FMCG), auto and auto ancillary, chemical and pharmaceutical industries, which are likely to drive the demand further, thus pushing the enormous warehousing volume growth to the next level. Companies’ such as Amazon, Delhivery, 4tigo Network Logistics, and DHL have secured the infusion of funds on the warehousing activities and have announced plans to expand their warehouses shortly. We expect the logistics and warehousing sector to witness increased traction from foreign investors in the coming years. However, the biggest challenge faced by this sector would be the acquisition of economic land parcels for setting up the facility.

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